The Linux Killer

Last February, Darl McBride received a Federal Express package at his home in Salt Lake City with a sticker proclaiming in big, bold letters: live worms.

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Understandably cautious, McBride's wife brought it into the garage. When her husband discovered that there were, in fact, worms wriggling inside the cardboard box, he threw it away.

It was just another indignity for the chief executive of the widely unpopular SCO Group. McBride has also received death threats, a challenge to a fistfight, and a flood of denial-of-service attacks targeting his company's email servers and his home phone. He's started carrying a gun for protection. Friends tease him that in two short years, he has displaced Bill Gates as the most hated man in high tech.

It took Gates decades of hard work to achieve that distinction.

What has the son of a farmer, a devout Mormon, and the father of seven done to so swiftly earn the honor? McBride has transformed SCO into a legal missile aimed at the heart of the open source software movement. His strategy threatens to undo the progress of Linux and other free operating systems developed by programmers who believe that collaborative efforts have produced the most robust and reliable code.

SCO claims it owns the intellectual property rights to the Unix operating system and that contributors to Linux have pilfered that code. It further asserts that IBM in particular has illegally diverted the SCO family jewels into the Linux system. Every Linux user, SCO concludes, owes it money. To press these allegations – and scare the stuffing out of Linux users – SCO brought out the heavy artillery: Early last year, McBride hired famed litigator David Boies, who led the federal government's antitrust case against Microsoft and represented Al Gore in the 2000 presidential election recount.

SCO's legal fusillade has exploded over the past 18 months with jarring repercussions. SCO has either initiated or is defending itself in seven lawsuits before five judges in four states and two countries. It is taking on IBM and Red Hat, two companies that sell Linux-based products, as well as AutoZone and DaimlerChrysler, two that use them. Another claim, against Novell, centers on whether that company actually transferred the copyrights when it sold the Unix business in 1996 to the Santa Cruz Operation, one of SCO's precursors. These lawsuits have generated thousands of pages of legal briefs at costs that exceeded $3.4 million in the first quarter of 2004 for SCO alone. Hopeful Linux advocates predicted that courts would quickly dismiss SCO's claims. But the lawsuits plod along like horror-flick zombies that won't die.

Sitting in a conference room at SCO headquarters, flanked by two walls of floor-to-ceiling shelves containing thousands of freshly bindered Unix licensing contracts, McBride says that all the noise suggests his team is about to score an upset victory. "The yelling gets the loudest when you're near the end zone," he says, banking a metaphor off years of devotion to the Oakland Raiders. "We're in their stadium, and it's as noisy as it can get. But we think the crowd is going to get very quiet when we put some points on the board."

Stocky and thick around the waist, his dark hair graying at the temples, Darl McBride doesn't seem like a bomb-throwing, high tech counterrevolutionary. He speaks imprecisely and haltingly about issues like constitutional law and the GNU General Public License, which governs the distribution of Linux. But McBride is certain that he's right, even if many legal analysts say the factual reed on which SCO bases its claim is thin. He believes he's on the just side of a historic struggle that has significance beyond today's headlines.

"It seems to me that the battle isn't really SCO versus IBM, or SCO versus Linux," McBride says. "I think there's a war going on. The war is around the future of the operating system, and whether it's going to be free or not."

On that score, at least, McBride is right. Over the past decade, Finnish programmer Linus Torvalds and his global band of coders have created an open operating system just as capable as closed proprietary systems like Microsoft's Windows or Sun Microsystems' Solaris. Companies from IBM to Red Hat sell services based on Linux, often at substantially less than what it costs businesses to buy and operate Windows. Corporate America has noticed. Linux now runs on 19 percent of servers, according to research firm IDC, and on a small but growing chunk of the desktop market. Meanwhile, millions of consumer electronics devices – from cell phones to DVRs – rely on Linux, too.

The effects of Linux's rise can be seen throughout the tech industry. Microsoft agreed in April to pay $2 billion to archenemy Sun to settle all patent claims and to work on interoperability between Windows and Solaris. The reason: They have a common enemy in Linux. Last fall, IBM funneled $50 million to Novell to help it buy the German firm SuSe, a Linux distributor. The deal completed Novell's defection from the closed team (as a vendor exclusively selling its own operating system, NetWare) to the open source team.

"There's a war between Microsoft and IBM, at the highest levels of expenditure, over what amounts to the most important question in the IT industry in the beginning of the 21st century," says Eben Moglen, general counsel for the Free Software Foundation. "Will software be closed and exclusionary? Or will it be a public resource that everyone helps to make and maintain? The SCO lawsuits represent the moment the old business model tries to assert control again."

There may indeed be a holy war raging, but SCO joined it out of desperation, not in deference to a higher calling. The very day that McBride took the job as CEO in 2002, the company, then a friendly Linux reseller known as Caldera Systems, received a delisting notice from Nasdaq – despite having done a reverse four-for-one stock split just three months before. It then spent $4 million in a stock buyback to boost the price, which left the business with less than four months' worth of cash in the bank. Caldera's Linux operation was spending $4 for every dollar in revenue it earned. McBride faced a nearly hopeless situation. One of his first moves was to change the name of the company to the SCO Group and craft a strategy to use its ownership of Unix as a legal weapon against the Linux community.

That tactic should not have been a surprise, says Mike Anderer, McBride's longstanding friend and a SCO consultant at the time. "If you're a CEO and your core business is going away and your only assets are intellectual property, what would you do?" he asks. "Intellectual property was the last piece of ammunition."

The tale of SCO and its legal jihad against Linux is, at one level, about disruptive changes in the software business and the increasing threat of open source software to proprietary vendors like Sun and Microsoft. But it's also the story – until now untold – of the relationship between McBride and Anderer, colleagues who spent much of the late '90s honing a business strategy based on one precept: aggressive licensing of intellectual property. This approach became the linchpin of SCO's business plan.

McBride and Anderer met in the mid-'90s at Ikon Office Solutions, a Fortune 500 company that sold and serviced copiers and printers. McBride ended a 10-year career at then-dimming tech giant Novell in 1996 to start Ikon's technology services division. Though McBride had never done any M&A work, Ikon gave him remarkable freedom and the backing to pursue a series of acquisitions of small companies around North America. The idea was to develop Ikon's ability to sell and service digital networks for businesses. McBride's first stop was the Computer Group, a Columbia, South Carolina, company Anderer had founded to sell Novell products to businesses.

In a deal that some former Ikon managers now say was overpriced, McBride paid $50 million for the Computer Group. A newly minted millionaire, Anderer moved to Salt Lake City to join McBride's senior staff. The two men began traveling the country, buying up 33 companies in little over a year and spending tens of millions of Ikon's stock and cash. It was, according to a half-dozen accounts from people involved in the roll-up, a failure. The challenge of integrating one company, let alone 33, easily exceeded the capabilities of McBride's small crew. "It was a recipe for disaster, especially without strong leadership, and we didn't have it in Darl," says the head of one of the firms Ikon acquired.

In 1998, Ikon fired McBride (and as late as 2001 was still writing off his acquisitions). McBride turned around and sued his former employer for $10 million, claiming breach of contract, nonpayment of wages, and fraud. It was the first instance of McBride using lawsuits to hack through a thicket of business problems. He also said his bosses were defaming him. (Court documents don't specify the nature of the alleged defamation.) Ikon countersued, charging that McBride violated a noncompete clause in his contract after he left Ikon and started his own tech consulting firm, SolutionBank.

McBride describes the next nine months as a personal and professional nadir. In the middle of a divorce from his first wife, with legal fees mounting in his battle with Ikon, he faced bankruptcy. McBride eventually dropped his lawsuit, and, as part of the settlement, walked away from his startup. Ikon agreed to pay him the $1.14 million severance fee in his contract, half of which he turned over to his ex-wife. (SolutionBank also liquidated his shares. Renamed SBI, it went on to purchase former dotcom highfliers Razorfish and Scient.) "I basically got paid to sit on the sidelines during the thick of the Internet boom," McBride says.

As he ricocheted from one crisis to the next, McBride found he could depend on one man: Mike Anderer. Court documents show that Anderer lent McBride money to buy a house during the Ikon lawsuit in 1998, when McBride was in financial straits. Soon after, Anderer invited McBride to join his own post-Ikon venture, a business incubator named Silicon Stemcell; for his role as silent partner and occasional consultant, McBride received 5 percent ownership of the firm.

McBride may have appreciated his friendship, but others found Mike Anderer intolerable. Out of the eight former colleagues contacted for this article, five offered unsolicited sentiments of relief that they no longer work with Anderer; two said they were trying to suppress memories of their experiences. "He's supercompetitive," said one. "If he knows you'll faint at the sight of blood, he'll cut himself just to watch you pass out." Another said Anderer could be so moody and explosive that at Ikon, employees were "convinced he needed professional help." The colleagues described Anderer as intelligent and introverted but also exceedingly aggressive and prone to sending bombastic emails at all hours. "It's as if he sat his butt in a bucket of gasoline and lit a fire," said a third.

"I'm not passive-aggressive," says Anderer, "I'm usually actively aggressive." He knows some people don't like him: "You don't make a lot of friends being real opinionated, but that's who I am." Colleagues theorize that distressing personal circumstances may have fueled his behavior. Anderer lost both his sister-in-law and, following their divorce, his ex-wife, to suicide. He says his experiences with mental illness in his ex-wife's family give him sympathy for the misfits of the technology business. He and his second wife provide a temporary home for up to 10 disadvantaged children at a time.

At Silicon Stemcell, McBride and Anderer polished the strategy they'd repeat at SCO: turning intellectual property into a revenue stream. Anderer, McBride, and four managers who had served with them at Ikon's technology services division pooled their ideas for products, then attempted to patent them. It was 1999, and they were in the business vanguard, devising a new way to create wealth. Something as intangible as a claim to owning an idea, they realized, could be used to extract money from innovators in related fields. Even if Silicon Stemcell's patents weren't finalized, it might still be cheaper for startups to pay licensing fees to Anderer's group than to fight protracted legal battles. Silicon Stemcell wouldn't even have to create businesses, it could thrive just by collecting these fees. Stanford law professor Mark Lemley, who specializes in patent law, calls this "the business model of the new millennium."

Ironically, IBM pioneered the strategy. Mired in a slump in the early '90s, it marshaled all its patents and sent out letters demanding licensing dollars from alleged infringers. Big Blue now reaps almost a billion a year in licensing revenue. The trend accelerated as entrepreneurs – savvy or amoral depending on your perspective – slipped their patents into their holsters and went looking for a fight. Silicon Stemcell was among them.

According to three sources familiar with the firm, the so-called incubator didn't actually hatch new companies. Instead, it used high-pressure tactics to attempt to obtain licensing fees. Anderer sent entrepreneur Mark Cuban an email during the sale of Broadcast.com to Yahoo! in 1999, demanding a licensing fee on methods of broadcasting interactive video – patents that Silicon Stemcell was still shepherding through the federal bureaucracy. "I think what I called him was a patent terrorist, and dismissed it," Cuban recalls.

Anderer explains, "We wanted to do a friendly patent deal, at which point I learned there was no such thing." He claims he could have fought Cuban in court but opted not to.

Anderer, McBride, and their partners had more success with a Tempe, Arizona, shopping-comparison site called IQOrder-.com. On the eve of IQOrder's acquisition by the online yellow pages firm Infospace in 2000, Anderer disclosed that he possessed relevant patents and demanded IQOrder pay a tariff. Asked about the deal, Anderer says it was settled "with a single letter of clarification from me" and notes in his defense that "I have never sued anybody for IP-related issues." Of course, Anderer didn't have to sue – just the threat of litigation was enough to compel IQOrder to pay up. Cofounder Michael Bates won't disclose the sum: "They were able to inject themselves into our situation when we were vulnerable," he says. "It cost us some money and we all moved on."

At least two Silicon Stemcell partners left in protest over these kinds of transactions, frustrated that the company wasn't building real businesses. Two firms did eventually emerge from Silicon Stemcell's portfolio: Digital Broadband Application, a company that licenses interactive-TV patents, and AirClic, which sells barcode scanners for mobile devices. AirClic did raise money after the Silicon Stemcell partners began to drift apart. Estranged from several of his colleagues, Anderer renamed his company S2 Strategic Consulting.

In 2002, when Darl McBride bounced into the top spot at SCO, he began studying its patents and other intellectual property assets. He knew just who to turn to for help. "Darl's a friend," Anderer says. "He knew that I had an understanding of intellectual property issues. And I knew what kind of trouble SCO was in." He signed on as a consultant, helping McBride and his new team sift through the original contracts that governed the distribution of Unix. Anderer compares it to "being an archaeologist given the keys to an unexplored Egyptian museum basement." He expresses surprise that IBM didn't simply purchase SCO and donate the Unix code to the public domain; it would've been much cheaper than the current legal fracas.

Within 12 months of taking charge, McBride had changed SCO's name and business model, hired one of the country's most famous lawyers, and begun filing lawsuits in Utah courts. But McBride and Anderer would soon lose control of the legal beast they helped unleash.

SCO put the tech world on notice in early 2003 that it was setting up tollbooths on all roads leading to Linux. By hiring David Boies, it sent out a clear message that it would enforce its claim to owning parts of the otherwise free software. SCO was able to afford the legal heavyweight after Sun bought a broad Unix license, thereby stocking the company's near-empty coffers. (McBride's brother, Kevin, an attorney then living in Fort Lauderdale, made the first approach to Boies, who had an office one block from Kevin's law firm, Angelo, Barry & Banta.) Boies' involvement gave the open source community lots to buzz about. In an unusual form of compensation, the attorney and his firm received 400,000 shares of SCO in addition to a $1 million retainer. His firm is also set to receive 20 percent of any judgments or settlements that result from the case – and even gets to pocket one-fifth of all investments in

SCO or of its sale price if SCO is acquired during litigation.

McBride claims he was inspired to fight after a January 2003 LinuxWorld conference, at which IBM vice president Steven Mills gave a speech bragging that it took Big Blue's engineers only a weekend to port certain functions of AIX, its version of Unix, into Linux. (In fact SCO announced the day before Mills' talk that it had retained Boies.) After a couple of months of bitter threats and counterthreats, SCO sued IBM, claiming that Big Blue had violated its Unix licensing agreement.

McBride realized he would need deep pockets for a long, grueling battle. He again called upon his friend Anderer, this time to approach Microsoft. Anderer had contacts there dating back to his days with the Computer Group. At the very least, McBride thought, Redmond might pay cash for a Unix license. But he also hoped the tech giant would contribute financing so it could continue to litigate.

Courting Microsoft was a challenge. Caldera had been a pesky thorn in its side, not only by selling Linux but by waging a successful antitrust battle against Microsoft for squashing an old operating system called Dr-DOS, which competed with its own MS-DOS.

Anderer's mission was only partly successful. Microsoft paid $13 million for a relatively narrow license for its Windows Services for Unix product – moving itself to the bottom of any hit list of future SCO litigation targets. But it declined to pitch in funding. "These guys were as reticent as they could be. That's a fact," Anderer says.

Reticent, maybe – but still helpful. Microsoft executives, including then-M&A chief Richard Emerson, suggested that SCO approach Bay Area venture firm BayStar Capital, known for investing in public companies. BayStar, it turned out, thought SCO's lawsuits were a good bet. It bought $20 million worth of equity and debt in SCO in a transaction called a private investment in public equities, or PIPE. BayStar's regular investment partners at the Royal Bank of Canada ponied up $30 million.

In less than two years at SCO, McBride, it seemed, had beaten long odds. He secured financing for a company without a growing business and elevated its stock price from 75 cents to more than $20. Unsurprisingly, SCO insiders (except McBride) began lining up to sell their stock.

But the hubris and combativeness of some of SCO's key players would soon make it all unravel. Anderer brazenly lobbied SCO for a commission on the BayStar deal, on grounds that his contacts with Microsoft helped land the investment. His pleading, grammatically sloppy email to SCO senior VP Chris Sontag somehow ended up on open source advocate Eric Raymond's site, OpenSource.org. In his message, Anderer requests a cut of SCO's latest round of financing and fingers Microsoft executives as brokers of that transaction. Raymond promptly declared SCO Microsoft's "sock puppet." Critics went wild with unfounded speculation that Microsoft was coordinating lawsuits targeted at Linux.

"It was just a late-night email sent out on my laptop. I was slammed and didn't proof it, which was a bit embarrassing," Anderer says of the infamous message. SCO, which denied his request, said Anderer simply misunderstood details of the financing.

But Lawrence Goldfarb, a managing partner of BayStar, seemed to contradict SCO by confirming that Microsoft's recommendations had, in fact, led to the deal. "Did I know, after looking at SCO, that of course Microsoft would find the funding of this company to be a good thing for Microsoft? Well, duh," says Goldfarb. "I knew Microsoft's motivation, but if I can make a dollar where I wouldn't otherwise, why should I be concerned?"

SCO's public response and the denial of his request for a commission angered Anderer. His personal and professional relationship with McBride ended. He muses that he has six years under Utah state law to pursue a legal claim against SCO for what he believes is his rightful compensation.

Meanwhile, Goldfarb now owned around 20 percent of SCO – and didn't like what he saw. McBride was exchanging fire in the press with multiple members of the open source intelligentsia and was badly outmatched. McBride's letters to the public and to Congress were feebly argued, and the rabid anti-SCO community on the Net eagerly dismembered them. With faith declining in SCO's legal claims and its management, the stock price dropped back into the single digits.

"Do I wish certain people in the SCO camp would keep their mouths shut? Yeah, I do," says Goldfarb. He also didn't like watching SCO use his dollars to try to rebuild its flagging Unix business. He was betting only "on my good friend David Boies. That's all I care about." In April, he publicly called for the return of his investment, part of a ploy to pressure SCO to quietly focus on the lawsuits and abandon the Unix business. In May, the Royal Bank of Canada sold BayStar most of its shares, strengthening Goldfarb's position. Goldfarb says he consults with Boies each week and has high hopes for the lawsuits.

The courts will decide whether that hope will ever be rewarded with a big payoff. If SCO loses, the company is likely toast. But winning will be a tall order. SCO must show that the old, murky contracts between AT&T (which developed Unix), Novell (which bought the operating system from AT&T in 1993), and the old Santa Cruz Operation deliberately transferred the Unix copyrights to the new SCO Group; it also must show that it owns the rights to derivative flavors of Unix, like IBM's AIX. Finally, and perhaps most difficult, SCO must prove IBM and other Linux programmers around the world got sloppy and ported proprietary code into Linux. Legal experts tracking the case think each hurdle – let alone all three – is difficult to clear. The odds are clearly against SCO.

But if SCO and its star litigator succeed, what then for Linux? The open source community will adapt. Linux programmers will replace the copyrighted code with their own new versions and continue their assault on proprietary software. With a favorable precedent, more intellectual property owners will come forward claiming to own pieces of Linux. Ironically, with the SCO case behind them, Linux advocates may be better prepared to withstand them. For instance, efforts are now under way to create an insurance fund to cover damage claims against Linux.

Win or lose, SCO and Darl McBride will be remembered for ushering in a new era: a time in which open source software, and the hackers behind it, are so successful that the industry they are undermining starts to fight back with every available weapon.

The SCO Strategy: Sue, Sue, Sue

Armed with star attorney David Boies and not much else, McBride has turned litigation into "the business model of the new millennium." Some milestones:

June 2002
Darl McBride takes the helm at Linux distributor Caldera Systems, which is quickly renamed the SCO Group.

January 2003
• SCO adopts a strategy to aggressively maintain its intellectual property and hires legal ace David Boies.
• IBM senior VP Steven Mills boasts how easy it was to put its version of Unix code – over which SCO claims ownership – into Linux.

May 2003
• Linux zealots retaliate! SCO is hit by the first of several denial-of-service attacks.
• SCO warns 1,500 businesses that "legal liability for Linux may extend to commercial users."

August 2003
• Fearing it's the next target, Red Hat preemptively sues SCO and establishes a $1 million Linux defense fund.
• Open source advocate Eric Raymond admits the latest denial-of-service attack on SCO was perpetrated by "one of us," but the culprit is not found.

September 2003
In an open letter, McBride declares his enemies "must respect and follow the rule of law" and insists that "respect for intellectual property is not optional – it is mandatory."

October 2003
Short of cash, SCO raises $50 million from BayStar Capital and the Royal Bank of Canada.

January 2004
The Open Source Development Lab, home to Linux creator Linus Torvalds, initiates a Linux defense fund.

April 2004
BayStar calls for the return of its $20 million investment in SCO.

Anonymous Source

Linux began as Linus Torvalds' student hobby. Collaborators added to it bit by bit. Here's why that's a problem.

Darl McBride is right about one thing: There's a big problem with Linux. But don't blame the messenger. Blame Linus Torvalds.

The problem is that the free operating system created by Torvalds and his collaborators is poorly documented. As result, the question of who wrote what – and who owns what – is a fair one. Still, Torvalds could hardly have seen this day coming. After all, he was a mere student in Finland when he started developing his operating system in 1991; it was "just a hobby," as he put it in a newsgroup posting at the time, adding that it "won't be big and professional like GNU," Richard Stallman's free operating system.

So Torvalds winged it: Contributors to Linux weren't required to formally assign their copyrights to Torvalds, nor to guarantee the copyrights belonged to them. That let Torvalds build Linux fast and flexible, but it also meant the project was one big handshake deal – fine for a hobby, but not the most sound basis for what would become a $25 billion business.

McBride cited this absence of a paper trail in one of his public letters to the open source community last year, claiming that it resulted in "fundamental structural flaws" in Linux and, indeed, in all open source development. "At a minimum, IP sources should be checked to assure that copyright contributors have the authority to transfer copyrights in the code contributed to open source. This is just basic due diligence that governs every other part of corporate dealings."

Stallman took a different approach with GNU, requiring contributors to sign over their copyrights. "Stallman was right and Linus was wrong," says Free Software Foundation general counsel Eben Moglen. "You need to get the copyright assignments in writing. And you need a form of promise that the rights are theirs to give in the first place. I've got file cabinets of both in my office." It's a tad ironic: In contrast to Stallman's dogmatic approach to free software, Torvalds' ad hoc method is likely what enabled Linux to thrive. Whether Linux would've happened with a paper trail in tow, well, that'll go down alongside other great unanswerable questions, like what would have happened if Apple had freely licensed the Mac OS early on.

But McBride errs when he says a cloud hangs over open source at large. Though Torvalds may have been awfully casual in 1991, his work helped create a time-tested model of hierarchical collaboration. Many open source projects have adopted the Torvalds approach but likewise emulate Stallman's rigorous insistence on assignments and warranties. Projects that take copyright seriously – rather than cavalierly reject it – are protected from spurious claims.

And now Linux is coming on board. In late May, the Open Source Development Lab – a corporate-funded consortium that supports Linux and now employs Torvalds – announced he and his deputies would begin requiring documentation for all new code submissions. From now on, Linux developers must stipulate that they wrote and own their contribution and that it's covered by an appropriate open source license. "There will be a crisp and clean database that shows who submitted the code and when they submitted it," says OSDL chief executive Stuart Cohen. "The more peace of mind we can provide, the more Linux grows and the more market share it will have."

That's a start. But it stops short of transferring copyright, which the OSDL says it doesn't need, and it leaves open the question of whether Linux needs to be rewritten, top to bottom, with proper attributions, permissions, and paperwork for every line of code. Torvalds and his army are "certainly capable of doing that," Cohen says, but it would demand a huge amount of time and manpower. That might be a small price to pay to protect Linux. – Thomas Goetz

Brad Stone (bstone@newsweek.com) is Newsweek's Silicon Valley correspondent and the author of Gearheads: The Turbulent Rise of Robotic Sports.